Australian bond investors turn green
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The global corporate green bond market has shown significant growth and Australian investors should have increasing opportunities to "go green".
"Green" bonds are on the rise in Australia, providing funding for environmentally sustainable projects while still offering economic returns to investors.
With new products emerging, both institutional and retail investors should have increasing opportunities to "go green".
According to the Clean Energy Finance Corporation (CEFC), the Australian green bond market has grown from zero in 2013 to $600 million in issuances in 2014 and $1.2 billion in 2015, bringing with it more than 100 institutional investors.
While the global green bond market was established around a decade ago, the first Australian dollar-denominated green bond was issued in 2014, with the World Bank Kangaroo Green Bond attracting $300 million from investors.
Other large issues have followed, including National Australia Bank's (ASX: NAB) $300 million Climate Bond, the $600 million Kangaroo Green Bond issued by German development bank, KfW, and a $600 million Australia and New Zealand Banking Group (ASX: ANZ) Green Bond.
In April 2016, the CEFC invested $20 million in the first certified green tranche of a securitisation in the Australian market issued by FlexiGroup Limited (ASX: FXL), linked to solar and renewable energy assets and certified by the London-based Climate Bonds Initiative (CBI).
The CBI estimates labelled green bonds have grown from under US$5 billion in 2010 to nearly US$42 billion in 2015, with an estimated global market of around US$150 billion.
The Australian green bond market has attracted interest from both domestic and international investors, particularly from local institutional investors, allowing them to broaden their investments without increasing credit risk or reduce returns.
While domestic commercial banks and international development banks have dominated Australian issues, governments and others are showing increasing interest.
In July, Victoria became the first government in the nation to issue green bonds, raising $300 million in a triple-A rated bond certified by CBI, which was supported by 17 investors comprising insurance companies, fund managers and investors with a specific green or socially responsible investment mandate.
According to the Victorian government, the proceeds will help finance state investments in energy efficiency, renewable energy generation, low carbon public transport and water treatment, including LED traffic lights, low-carbon buildings, the Melbourne Metro Tunnel, new trains and the development of a large-scale renewable energy power station.
Andre Severino, Nikko Asset Management's head of fixed income for the US and Europe, said Nikko AM had been a "major investor" in the issue, not only for its green funds but also its global fixed income funds.
The fund manager started its involvement with green bonds in 2010, when it launched a World Bank bond fund for projects aimed at mitigating climate change.
"Back when green bonds were first being issued, it was more around environmental awareness and feeling good about cleaning up the environment. But the market is now evolving to a point where the financials are the same and there is more and more liquidity," he said.
"The economics of these green bonds are essentially identical to non-green bonds, and you also have a free benefit in that the proceeds are used to improve the environment."
Severino said the corporate green bond market was showing significant growth, with companies such as technology giant Apple recently issuing US$1.5 billion in bonds to finance clean energy projects across its global operations.
He also pointed to China as another growing market for green bonds, saying: "They have set out a pretty aggressive program to become more environmentally conscious, and as a result of that we are starting to see more green bond issuance there."
Moody's Investor Services expects green bond issuance to exceed US$50 billion in 2016, helped by international efforts such as the Paris agreement on climate change.
"The environmental, social and governance space is seeing really big growth--it gives investors the ability to dictate how they want their funds to be used to change corporate behaviour," Severino said.
With Morningstar senior credit analyst John Likos pointing to the benefit of high-grade Australian corporate bonds, it might not be too long before local companies start "going green" to attract a new wave of investors.
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Anthony Fensom is a Morningstar contributor.
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